Short Term Operational Liquidity
Working capital is one of those business school topics that has real-world relevance for the small business owner with no formal training, operating mostly on his or her own common sense, such as Zalman Silber, serial entrepreneur and success story. In business management theory, working capital is a way to measure finances, in particular those readily available to a business. Working capital is hence an indication of operational liquidity, as simply derived by subtracting the amount of current liabilities from the amount of current assets. When current assets are less than current liabilities, a condition of working capital deficiency exists, also known as a working capital deficit.
All such people know about working capital, however, comes from having dealt with inventory and accounting day in, day out. But when these small-time businessmen and women think of the matter, they are likely only imagining two things, borrowing money or putting more equity in their business – the traditional sources of business capital.
Yet most business owners don’t realize that one of the best ways to finance working capital is to let their suppliers do it for them! There’s no need for a small business loan when the money is already there. One must “think outside the bank” to use this strategy, but if you think about it, working capital finance is easy when carried on the backs of your suppliers.
Generally, banks are not the most suitable alternatives for problematic situations regarding working capital. They can really foul up the works when all you want is to know whether they will lend you money. Bureaucratic red tape is inevitable, as is being nickeled and dimed on every little thing when it comes to banks. And now in these recessionary times, the typical business will also find whole lines of credit eliminated outright.
Instead, why not just let your suppliers finance your assets? If you think about it, suppliers typically finance working capital already, insofar as they provide and deliver supplies but only receive payment for them at the end of the month (or even later, in some cases). Such a situation in effect frees up your money for other purposes, money that is literally working capital!
They’re already participating, whether they’re aware of it or not, and since you’re only taking advantage of a system that’s already in place, you don’t have to worry about any legal issues. What you do need to do is find a way of determining your supplies-to-finances ratio right now so that you can increase and maximize it to your benefit. One easy-to-understand formula for supplier-financed working capital is to multiply your total assets by a hundred (to generate an answer in percentage form) and then divide by the amount of your accounts payable (whether monthly or whatever terms you have secured).
Then you too can be a Zalman Silber!